With Zuma Finally Out, Market Focus Turns to Hard Task of Reform

(Bloomberg) -- Just because Jacob Zuma has resigned as president doesn’t mean it will be smooth sailing for South African assets, investors and analysts say. His ouster has been priced in, and his likely successor, Cyril Ramaphosa, has the daunting task of reforming a battered economy.

The rand, already the world’s best performing currency over the past three months, rose 0.5 percent to 11.6622 per dollar as of 1:26 p.m. in Johannesburg, and the yield on the nation’s 2026 local-currency bonds has fallen to the lowest level in more than two years.

Stocks also rallied, sending the price-to-estimated earnings multiple of the FTSE/JSE Africa All Share Index above MSCI’s gauge of world stocks for the first time since 2016.

The next critical milestone will be an assessment expected by the end of next month of South Africa’s credit rating by Moody’s Investors Service, which placed the nation on review for a downgrade in November.

Here’s what analysts and investors are saying:

Sumitomo Mitsui Trust Asset Management Co.

Hideaki Kuriki, chief fund manager in Tokyo

• The resignation has been priced into the rand, which has strengthened against the dollar since the middle of December when Ramaphosa won the ANC vote; the new administration will probably take measures to attract funds from overseas
• However, the economy is weak due to structural factors, while there’s credit-rating downgrade risk stemming from deteriorating fiscal conditions, and those won’t probably drastically change only because of leadership change or policy revisions; it would take some time to see changes in the actual economic conditions
• The credit rating may be maintained this time as Moody’s may want to assess the new policies by the administration, but downgrade risk would remain
• “I want to add to the rand exposure but the currency has been rising so far, and it’s difficult to buy at those levels,” Kuriki said. “As long as the downgrade risk lingers, it’s risky to go overweight”

Peregrine Treasury Solutions

Bianca Botes, Corporate Treasury Management in Pretoria

• Global markets are smiling on South Africa, as it’s the second African country in a matter of months to take a stand against corrupt leadership and skewed politics; should the state of the nation address and the budget speech go down without too much criticism, one can almost assume that Moody’s will hold off from downgrading South Africa for the time being
• The rand should trade in a range of 11.70 to 12 per dollar leading up to the budget speech next week, with some favorable movements as Ramaphosa gets handed the official title of president

Oanda Corp.

Stephen Innes, head of trading for Asia Pacific in Singapore

• With the political risk out of the way due to Zuma’s removal, the rand, as will most emerging market currencies, will trade with a very strong bias to U.S. dollar sentiment; the lack of currency and interest-rate correlation suggests the dollar will struggle
• Given the waves of dollar negativity, the rand may test 11.65 per dollar in the near term provided global risk sentiment remains in equilibrium
• “However, I’m not in the mood to chase high-yielder EMs these days but would be a tactical player on pullbacks,” Innes said. “And most definitely, an opportunistic participant on another political wobble as they continue to be excellent buying opportunities”

Dai-ichi Life Research Institute Inc.

Toru Nishihama, emerging-market economist in Tokyo

• While Zuma’s resignation seems to be welcomed by the financial markets for now, given the problems that Ramaphosa’s administration will face, any gains in the rand may be limited; the new administration has a bumpy road ahead of it
• The new administration needs to rehabilitate the country’s fiscal condition that has been worsening since the start of Zuma administration, despite the bottoming-out of international commodity prices
• Corruption has also hindered foreign-direct investment, as well as the progress of public investment; that’s lowering the country’s potential growth rate, which has been on a downward trend since Zuma took over
• Ramaphosa will need to come up with measures to return the economy to “how it is supposed to be” through eliminating corruption as well as improving fiscal conditions, which will be quite difficult

Investec Bank PLC

Julian Rimmer, emerging markets trader in London

• “Everything looks positive, obviously in emerging markets it doesn’t always work out that way. At this stage, international investors have generally been underweight South Africa for several years. I think they will all be scrambling to increase those weights.”
• “Much of this was expected. It’s just a huge relief for the market that it’s actually behind us and that we can actually just look forward to hopefully Ramaphosa doing some of the things that he’s promised”

Ashburton Investments Management Co.

Wayne McCurrie, a money manager in Johannesburg

• “This is just a euphoric bounce on the back of the news and that could pull back just a bit. But unquestionably, the outlook is positive for South Africa for at least the shorter term”
• “This is the Cyril bonus, once the Cyril bonus is out the system we return to more conventional non-politic economic event that will drive markets”

Afrifocus Securities

Ferdi Heyneke, a money manager based in Johannesburg

• “A lot might be priced in at the moment with the current news. I think this was something that looked like it was going to come and since December the market has had a pretty big move, in particular on some of the banking stocks”

--With assistance from Thembisile Dzonzi Neo Khanyile and Srinivasan Sivabalan

To contact the reporters on this story: Yumi Teso in Bangkok at yteso1@bloomberg.net, Colleen Goko in Johannesburg at cgoko2@bloomberg.net, Lilian Karunungan in Singapore at lkarunungan@bloomberg.net.

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Dana El Baltaji, John Viljoen

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